U.S. DOL Shifts Stance on Classification of Independent Contractors

The U.S. Department of Labor (DOL) has recently altered its standards regarding classification of workers as independent contractors under the Fair Labor Standards Act (FLSA). This adjustment marks a significant departure from the previous, more rigorous interpretation of standards set under the Biden administration, impacting a wide array of employment sectors.

In 2021, the DOL introduced regulations aimed at tightening the criteria for determining independent contractor status. The primary goal was to address the widespread issue of worker misclassification, notably prevalent in sectors like ride-sharing, delivery services, construction, hospitality and healthcare. Misclassification deprives a worker of FLSA protections such as minimum wage and overtime compensation. The 2021 regulations called for evaluating the “totality of the circumstances” to ascertain whether a worker was economically dependent on an employer and therefore should be classified as an employee.

However, this rule faced considerable pushback from business groups, who argued that its expansive reach fostered uncertainty and increased the risk of litigation. They criticized consideration of indirect control by employers as a significant factor in employee classification, arguing that this could complicate compliance efforts and expose businesses to liability.

Responding to these concerns and ongoing legal challenges, the DOL’s Wage and Hour Division declared on May 1, 2025, that it would cease enforcing the 2021 rule and revert to prior criteria while it reviews and develops updated standards. The prior criteria include the “economic realities” test, which is grounded in federal case law and previous DOL guidance. This test evaluates multiple factors, including:

• The degree to which the work performed is integral to the principal’s business.
• The permanence of the relationship.
• The worker’s investment in facilities and equipment.
• The amount of control exercised by the principal.
• The worker’s opportunities for profit and loss.
• The level of initiative, judgment, or foresight required for market competition.
• The extent of the worker’s independent business organization and operation.

No single factor is conclusive; rather, the aim is to determine whether a worker operates an independent business or is economically dependent on the employer.

A new DOL rule is anticipated, which is also likely to be contested. In the meantime, a company employing individuals as independent contractors should consult a business-side wage-and-hour attorney to verify compliance and ensure correct classification. Bear in mind that if the DOL finds that a worker has been misclassified as an independent contractor, the employer may have to recompense unpaid overtime compensation going back two years as well as to pay liquidated damages, which effectively doubles the amount due. 

At the Law Offices of Donald W. Hudspeth P.C. in Phoenix, we counsel Arizona businesses on compliance with federal and state wage and hour and overtime regulations, including hiring of independent contractors. To learn how our knowledgeable attorneys can help you, call us at 866-696-2033 or contact us online.